Wednesday, May 24, 2017

Currency Investing for Small Investors, 24 MAY

If the point of investing is to make money, why not invest in money itself?

It seems logical, and plenty of people do it -- making money in recent years by betting on continued strengthening of the U.S. dollar for example.

In fact, the foreign exchange market is the largest securities market in the world, with trillions of dollars, euros, yen and other currency changing hands every day. Much of that is in hedging strategies, to assure that an investment in, say, a stock in a foreign company, does not lose value simply because of a change in exchange rates. ...

But speculators bet on those exchange-rate changes themselves though the foreign exchange market, where speculators trade futures contracts, which obligate their owners to buy or sell a given amount of currency at a set price on a given date.

Currency bets are seen as yet another way to diversify a portfolio, as they don't march in step with ordinary stocks and bonds. Factors that hurt stocks, like rising interest rates, may boost a currency.

So what do you need to know to get into this game?

First, getting started is pretty easy. A flood of new online trading platforms have been launched in recent years, many with tutorials and virtual trading features that let beginners practice with futures contracts before they put real money at risk. (Search for "currency trading.")

"In my personal opinion, the best method for a small investor is hands down trading the forex market," says Joshua Martinez, co-owner of MarketTraders Institute, an education site for currency trading. "The forex market is a very straightforward, liquid, clean market.

If you think the market is going up, you press 'buy' and if the market goes up you win. If the market falls you lose. ... It's as simple as buying low and selling high."

Many trading platforms have low account minimums, and believers like Martinez note that with 50-to-1 leverage, which is common, it's possible to turn a small bet into a big profit.

But others warn that leverage can also amplify losses, and many experts say the majority of currency trades by small investors lose money, mainly because amateurs are betting against the pros.

"I do not believe small investors should be involved in futures," says Manny Frangiadakis, principal at Twelve Points Wealth Management, a Boston-based firm that includes futures-trading advice in its services. "They can be extremely volatile and you can lose more than your initial investment if the market moves against you."

If a bet starts going bad, the brokerage may demand more cash to offset the potential loss, he adds.

Also, factors governing exchange rates are hard to fathom.

"Currencies are driven by a number of different factors including monetary policy, both home and abroad, geopolitical events, interest rates and future growth projections in the region," Frangiadakis says.

Frightened investors overseas may see dollars as a safe haven during times of turmoil, driving the dollar up against other currencies. In other words, they'll pay more euro or yen for every dollar. So any worrisome event can affect exchange rates.

Investors may flock to the currency of a country that offers unusually high interest rates, or flee one that's too stingy.

But it doesn't always work that way. The U.S. dollar has been in high demand despite low rates because it is considered safe. Many foreign investors use U.S. Treasury bonds to store reserves even though yields are historically low.

Obviously, political turmoil, war and economic problems can undermine a currency's value.

An investor accustomed to stocks, mutual funds and exchange-traded funds may find currencies pretty alien. Currency trading is done in pairs, meaning you buy one currency and sell another. Although many combinations are possible, the bulk of trading is in eight currencies: the U.S., Canadian, New Zealand and Australian dollars, British pound, euro, yen and Swiss franc.

Another consideration: currencies are not fire-and-forget investments like, say, index funds tracking U.S. stocks. Currencies are volatile, and the speculator needs to be on top of things and ready to buy or sell on short notice.

Investors who want the diversification offered by currencies but don't want the hassle and risk of futures trading can use mutual funds and exchange-traded funds.

​"ETF's that follow currencies operate much differently [from futures contracts] and are better suited for small-time investors," Frangiadakis says. "You can invest in an ETF that tracks certain currencies or a basket of currencies. For example, if you're invested in an ETF that went long the Euro then as the euro appreciated or depreciated so would the price of the ETF."

Another option, he said, is to invest in foreign bonds, which in dollar terms could rise or fall in value with changes in exchange rates.

The most common advice for beginners: Play it safe by keeping individual bets small and devoting only a small fraction of your investment portfolio to this sector. Play only with money you can afford to lose.

Jeff Brown spent nearly 40 years as a newspaper reporter, columnist and editor, including 20 years writing about investing, personal finance, the economy and financial markets. He spent 20 years at The Philadelphia Inquirer and has been freelancing since 2007.

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